Netflix Could Get Smacked With Higher Postal Rate

The U.S. Court of Appeals for the District of Columbia Circuit on Friday weighed in on a dispute between video game company GameFly and the U.S. Postal Service, siding with GameFly's position that the post office has been practicing price discrimination among its customers.

GameFly's original suit alleged that USPS was providing better terms of service to Netflix by charging it cut-rate fees even though its DVDs were being sorted by hand. Companies such as Netflix and GameFly have to pay the post office extra to keep their mail out of the automated sorting process, which can damage DVDs. An extra fee for hand-sorting is then typically required, but USPS was exempting Netflix from paying it.

The post office agreed GameFly had a grievance and changed its pricing structure -- but still did not charge both companies the same rate. Appeals court judge David Sentelle said that the Post Office either had to remedy the discrimination or provide a rationale for giving Netflix better treatment.

"The Postal Service has saved Netflix -- apparently its biggest DVD mailer customer -- from this crippling otherwise industrywide problem by diverting Netflix mail from the automated letter stream, shifting it to specially designated trays and containers, hand culling it and hand processing it," the judge wrote.

A Fair Deal

The post office is reviewing the decision, despite its conviction that its earlier price and service decisions with respect to Netflix and GameFly were fair.

"We are in the process of analyzing the GameFly court decision and its implications for the postal service," USPS says in a statement provided to the E-Commerce Times by Post Office spokesperson Toni DeLancey.

"The matter has been remanded to the Postal Regulatory Commission and the Postal Service will be prepared for subsequent legal proceedings in that forum," the statement continues. "However, as we stated in the earlier proceeding before the Postal Regulatory Commission, the postal service believes that the different treatment we provided to our customers was fully justified and reasonable and consistent with the law."

Presumably the post office came to this conclusion after considering the costs and the volume that Netflix delivers, Peter S. Vogel, partner with Gardere Wynne Sewell, told the E-Commerce Times.

Netflix Loses

With the appeals court decision in place, there are now only a few options USPS can pursue -- and they don't bode well for Netflix.

One possibility is to offer everyone the same special manual sorting service it has given Netflix without extra charge, Jeff Meyer, a professor at the
Quinnipiac University School of Law, told the E-Commerce Times.

While that would be great news for competitors and customers, such a move would eliminate Netflix's competitive advantage.

On the other hand, the post office might make the whole issue moot by charging Netflix the higher rate it charges all of its customers for the manual sorting service, Meyer said.

Given its financial difficulties, USPS is unlikely to opt for scenario No. 1. Challenging the decision through further appeals also seems far-fetched, Meyer said.

"The Postal Regulatory Commission could seek review of the D.C. Circuit's decision in the Supreme Court," he noted, "but this decision appears to be a very clear application of well-established law that the Supreme Court would be unlikely to overturn."

Make Way for Streaming

The upside for consumers is that such considerations will not be necessary when everyone moves to video streaming and DVDs become obsolete, Vogel pointed out.

Providers such as Netflix and GameFly will have another set of worries, though.

"Look at what happened on Christmas Eve when Netflix was out because the Amazon cloud was not operating," said Vogel. "The vulnerability of hosted sites creates a whole other situation."